Starting a small business can be stressful, with multiple demands on your time, not to mention financial pressures to succeed. For this reason, many people are choosing to ease the transition by continuing to work in their full-time job as they set out on the journey to self-employment. Having the security of a regular salary during this time allows you to build your brand and client base before taking the leap. Doing this means you’re both employed and self-employed and, while you don’t necessarily need to tell your employer about the situation, you will need to inform HMRC. It could also mean that your tax situation becomes more complicated, so it can be helpful to speak to an accountant to make sure you’re paying the correct amount in the most efficient way.
When you’re employed and self-employed simultaneously, your income from employment will be taxed at source through PAYE. It must also be declared in your self-assessment tax return along with your self-employed income. The total amount of tax and National Insurance Contributions you pay will be based on both figures minus any allowances or relief you’re entitled to.
You will still be eligible for the £12,570 personal tax allowance when employed and self-employed. Depending on how much you earn, you’ll also continue to pay either the 20% basic rate or 40% higher income tax rate on anything above that. So, if your salary is £20,000, you’ll pay 20% on £7,430. Class 1 National Insurance will be deducted from your salary; currently, the rate is 12% for earnings between £9,500 and £50,000.
Your P60 will detail your income tax and national insurance over the year, and you’ll need this to fill in the Employment pages of your self-assessment tax return.
Remember, though, your income tax is always based on total income, so if your self-employed profits push your total earnings into a higher tax band, you’ll have to pay the higher rate.
You’ll also need to detail your self-employed income on your tax return to ensure you pay any income tax and NI due. Whether you will pay Class 2 and Class 4 National Insurance contributions will depend on your earnings.
To correctly complete your self-assessment, you’ll need to record any income you earn and allowable expenses. So, if income is £8,000 and expenses are £500, income tax and national insurance will be due on £7,500. As this is above the small profits threshold of £6,515, you’ll likely have to pay Class 2 national insurance of £3.05 a week, but not Class 4, which comes into play if your profits are £9,569 or more a year. HMRC will confirm how much tax is due once you’ve submitted your self-assessment.
To submit your self-assessment, you’ll need to register as self-employed, and you may need to set up as a sole trader if you earn more than £1,000 from self-employment in a tax year. Read more about how to become a sole trader in our blog.
You will also need to create a Government Gateway account and get a user ID for a business tax account. Once you’ve done this, you’ll receive a letter with your Unique Taxpayer Reference (UTR) number within ten days. You’ll need this to file your return. You’ll also receive a letter with an activation code for your account. Once you have this, you can file your tax return online at any time by accessing your account.
You have until 5 October after the end of the tax year to register, or you could be fined.
You could also choose to set up as a limited company, although in this situation, you wouldn’t count as self-employed as you’d be a company director. This would create its own requirements regarding your tax, legal and statutory responsibilities. We discuss the advantages and disadvantages of both options in our blog; should you be a Sole Trader or a Limited Company?